We all work hard to make money and if we plan to save for retirement, we should also plan to ensure that we don’t pay more taxes than necessary. The following tools and tips will help plan for specific goals and minimize the taxes you pay.
RRSP’s are the cornerstone of your retirement savings plan. Taxpayers can contribute up to 18%* of their earned income, or $22,000 to a registered retirement savings plan established at a bank or other financial institution, which will earn income in the form of interest, dividends or capital gains, tax-free until the age of retirement or the age of 71, whichever comes first. Also, contributions to the RRSP can be deducted from taxable income in the year of contribution. If income is earned in any particular year, but no RRSP contribution is made, the ‘contribution room’ for that year carries forward to allow for larger contributions in later years to ‘catch up’ with your contributions.At retirement (or age 71), the RRSP funds can be fully withdrawn, or converted to a Registered Retirement Income Fund or annuity from which income is provided for retirement.
What is important to know is that the Canada Revenue Agency allows a certain amount of flexibility to access the funds prior to retirement (with certain conditions). For example, funds may be withdrawn to support post-secondary education under the Lifelong Learning Plan (LLP)**, or the purchase of a first home under the first-time Home Buyer's Plan***.
Further, CRA will allow for planning to reduce family taxes by allowing the higher income earning spouse to contribute to the RRSP of the lower income earning spouse. When withdrawn, the contributed funds will be recorded as income at the marginal tax rate of the lower income-earning spouse, effectively reducing the family tax burden.
Further, CRA will allow for planning to reduce family taxes by allowing the higher income earning spouse to contribute to the RRSP of the lower income earning spouse. When withdrawn, the contributed funds will be recorded as income at the marginal tax rate of the lower income-earning spouse, effectively reducing the family tax burden.
Key Dates
A taxpayer can continue to make contributions their RRSP plan up to March 1st of a calendar year against their contribution limit for the prior calendar year. In the year the taxpayer turns 71, contributions can be made up to December 31st.
For RRSP withdrawals for the Homebuyer’s plan, the qualifying home must be built by October 1st of the following year of the withdrawal.
For the Lifelong Learning Plan, you must have received a written offer to enroll before March of the year after you withdraw funds from your RRSP’s.
It is recommended that you consult with a financial planning and tax professional when planning for your retirement or before making withdrawals from your RRSP. An appropriate retirement plan will be prepared based on your specific personal circumstances.
Stay tuned for more articles for taxpayers and small business owners to minimize their taxes
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Thanks,
Regards,
Stephen Beech, MBA CMA
*The contribution limit for 2010 is 18% of net income or a maximum of $22,000. Refer to the CRA website for the current contribution limits
**RRSP funds may be withdrawn under the Lifelong Learning Plan (LLP) and are subject to certain conditions. Consult the CRA website or your tax or financial planning professional for more information:
***Under the Home Buyer’s Plan (HBP) is open to Canadian Residents with an RRSP looking to finance their first home (principle residence).
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